The COVID-19 pandemic, with its heavy toll on human lives, unemployment, and financial distress, should be considered as an important acid test for firms’ professed investments in their responsibility toward society. It is during such times that we can better understand how to interpret the Environmental, Social, and Governance (ESG) scores, standard proxies for firms’ corporate social responsibility, and what is really driving them. The paper “Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash,” by Rui Albuquerque, Yrjo Koskinen, Shuai Yang, and Chendi Zhang, has this objective. The authors show that U.S. firms with higher Environmental and Social (ES) scores were more resilient during the COVID-19 induced stock market crash: these stocks suffered lower stock price declines and lower volatility compared to other firms. The authors then investigate how ES policies build resiliency and look at theories of customer and investor loyalty. Firms with high customer and investor loyalty experienced the strongest stock price performance. Customer loyalty translated into higher operating profit margins of firms with high ES scores, even at a time when the economy as a whole was suffering through the first stages of a contraction. Overall, the results in the paper lend support to the view that consumer and investor loyalty play important roles in making high ES firms more resilient during stressful times.
Spotlight by Andrew Ellul
Photos courtesy of Rui Albuquerque, Yrjo Koskinen, Shuai Yang, and Chendi Zhang
First published August 3, 2020